India holds a fair share in the world economy and Indian capital market is one of the biggest in the world. The share market and the stock exchanges form a considerable part of the world economy. Since it is a huge market with the capital market forming a vital part of the financial system, it needs to be regulated or say governed in a systematic and disciplined way protecting the interests of the investors and their hard-earned money that they trade in. To fulfill this criteria and for a flawless and smooth functioning of this, SEBI came into existence.
Formation Of SEBI
It first came into existence in 1988 as a non-statutory body with the aim to regulate and control the securities market. It gained its statutory powers and became autonomous on may 12, 1992 with SEBI act 1992 passed by Indian parliament. It has its headquarters in Mumbai (business capital of India) and regional offices at New Delhi, Chennai, Kolkata, and Ahmedabad covering all four directions of the country. Over the years, it has also formed a local network of local offices in major cities of India.
Reason for formation of SEBI
In the 1980s, stock markets emerged as a boon to Indian economy drawing attention of individual investors. As the stock market evolved and started flourishing, there was also increase in malpractices like nonadherence to rules and regulation, price rigging, unofficial self-modulated merchant bankers, delayed delivery issues, etc. As a result, investors felt deceived and were losing trust in securities. So, government sensed an urgent need to regulate the smooth and systematic functioning of exchanges and thus the formation of SEBI. Before formation of SEBI, controller of capital issues was responsible for regulation of the same.
SEBI comprises of five departments, each department headed by an executive director. It also has two advisory committees to deal with primary and secondary markets, which consists of market players, investors associations and eminent persons.
The board consists of nine members:
- A chairman appointed by union government of India.
- Two official members from union finance ministry.
- One official member from reserve bank of India.
- Five other members who are also appointed by union government of India.
Roles and objectives OF SEBI
The main objective behind establishment of SEBI was to preserve the interest of the investors and their hard-earned money trading in the stock exchanges, to regulate and facilitate efficient and flawless functioning of the securities market, to promote its development and to resolve the matters connected to it. So it needs to coordinate and be responsive to three participants of the financial market.
- Issuers of securities
They are the ones who raise funds/shares in the market from different sources. SEBI needs to provide a healthy and disciplined environment for them.
It is the investor whose hard-earned money is sown in a hope to reap better returns. The market cannot afford to lose the confidence of the investors. So it is the SEBI who is responsible to preserve their interests and provide an environment which is free from malpractices.
- Financial intermediaries
There are a number of financial transactions that happen between investors and issuers of securities, which need to be taken care of. So, financial intermediaries like brokers, banks & consultants act as middlemen who issue the securities and sort out the issues between the two.
Powers of SEBI
The powers of SEBI can be categorized into three divisions:
Its drafts regulation, i.e. It has the powers to frame rules and regulations to preserve the interests of the investors and keep malpractices away.
In this, SEBI can pass hearings & deliver judgments pertaining to fraud and other malpractices.
It can conduct investigation against violators; it has enforcement power and holds an authority to inspect books and records of accounts and other documents if they get suspicious about violation of regulations.
Functions of SEBI
Primarily, the function of SEBI can be categorized under three sections – protective, regulatory and developmental functions.
- Protective functions
The actions taken by SEBI to protect and conserve the interest, rights and safety of the investors and other involved participants come under protective functions.
- Keeping a check on price rigging (manipulation of prices causing inflation or depression of the market price).
- Prohibit insider trading (any person connected with the company may have confidential information regarding prices of the securities which they may use for their benefit. This is called insider trading).
- Keep an eye on malpractices and unfair trade practices.
- Keep the investors updated and educated so that they can evaluate the securities and make profitable selections.
- Regulatory functions
These functions keep an eye on the functioning and execution of laws of the businesses in the securities market. These basically include:
- Framing guidelines and code of conduct to maintain and regulate proper functioning of the financial intermediaries such as banks, brokers, advisors, etc.
- Regulating overtake of companies.
- Conducting inquiries and regular audits of stock exchanges.
- Registration and regulation of merchant bankers, stock brokers, sub-brokers, trustees etc.
- Developmental functions
The function of SEBI is also to develop and promote activities to enhance business in stock exchanges. These include:
- Conducting and promoting training programs for intermediaries.
- Promote activities of stock exchange by adopting more affordable approach.
- Conducting regular research.
- Promote fair trading.
- Seeking and approving advanced technologies (internet trading).
While SEBI is working as an able regulator, there are lots of loopholes that are still present and need closer supervision including regulations of robo-advisors. Staying in tune with the disruptions, changes, even scams & fraudsters will help keep the regulation relevant & updated.